SpaceX makes beautiful rockets, yes. But does SpaceX stock cost too much? Image source: SpaceX.
Wall Street loves the next new thing. Eschewing the tried and true for the shiny and new, investors zig and zag, paying (sometimes ludicrously) larger prices for companies producing ethanol rather than oil, solar panels instead of coal, and generally speaking -- to any company run by Elon Musk versus any company without him.
But is that the right call?
Tried and true...
Take Orbital ATK (OA), for example. The space tech company formed from the combination of Orbital Sciences (established 1982) and Alliant Techsystems (founded 1990) has been in business for more than three decades. Over that time, Orbital ATK built itself into a premier provider of small and medium space launch vehicles, satellites, missile defense rockets, and other aerospace products.
According to data from S&P Global Market Intelligence, Orbital does $4.6 billion in business a year, earns nearly 10% operating profit margins on those revenues, and churns out more than $350 million in profits annually.
In exchange for all of this wealth creation -- wealth that investors can share in because Orbital is publicly traded -- Wall Street assigns Orbital ATK stock a market capitalization of $5.1 billion.
...versus shiny and new
At the same time, one of Orbital ATK's newer rivals is Elon Musk-founded Space Exploration Technologies -- "SpaceX" to its fans.
Established in 2002, SpaceX is less than half Orbital ATK's age and has a track record significantly less than half as long. SpaceX launched its first rocket barely 10 years ago, flying it out of Kwajalein Atoll in the Middle of the Pacific Ocean so it couldn't cause too much damage if the launch failed. (In fact, it did fail. As did the next two launches before SpaceX succeeded on its fourth try).
Since then, of course, SpaceX has performed admirably -- and beyond the wildest expectations of perhaps anyone other than Musk himself. But even so, it's hard to tell exactly how well the company is doing financially, because SpaceX remains a privately held company. Our best guess is that the company is doing perhaps $1.6 billion in annual revenues (about one-third what Orbital does in a year), and earning profits of perhaps $240 million.
Based on these numbers, Alphabet (GOOG -0.79%) (GOOGL -0.85%) recently invested $900 million in SpaceX, valuing SpaceX stock at an estimated $12 billion.
It's not the apples-to-apples...
Let me repeat that: SpaceX makes one-third the revenues Orbital ATK makes and earns one-third less profit than Orbital ATK earns, but it carries a private market capitalization more than twice what Wall Street values Orbital ATK stock at.
...but how fast the apple trees are growing
Does this disparity between the valuations of SpaceX and Orbital ATK stock make sense? At first glance, it appears to make no sense at all.
But consider: From 2006 to 2016, the time in which SpaceX has been operating, Elon Musk's brain child has grown from a company making no money at all into one generating $1.6 billion in revenues annually. During that same period, Orbital ATK has gone from making $3.5 billion in revenues a year, to making $4.6 billion a year.
I don't mean to discount the significance of "$4.6 billion" -- it's hardly a small sum. But still, ATK has only grown its revenues 31% over the past 10 years (less than 3% annualized), while SpaceX's rate of revenue growth is, literally, infinitely better.
Going forward, analysts who follow the stock expect to see Orbital ATK grow its revenues to $5.2 billion between now and 2020. That's 20% total growth, or about 3.7% compounded, and so marginally better than what Orbital ATK accomplished over the past 10 years. But it's not a patch on the growth SpaceX will achieve.
Space "X" marks the spot, and SpaceX stock is a pot of gold waiting to happen. Image source: SpaceX.
So far this year, SpaceX has been launching rockets at the rate of roughly one per month. Within a year, though, SpaceX could be launching biweekly, and within a few years -- weekly. That implies a rough 400% increase in revenues, versus Orbital ATK's likely 20%.
The real question, therefore, isn't why Wall Street values SpaceX at "twice as much as Orbital ATK." The real question is why it doesn't value SpaceX much, much higher.
